Federal credit program needed by rural banks

Without the Federal Reserve’s seasonal credit program, many rural banks could face a shortage of loanable funds, says Keith Leggett, senior economist for the American Bankers Association (ABA).

Established in 1973, the program addresses the difficulties that relatively small banks in agricultural or tourist areas can have with swings in liquidity throughout the year. For the most part, rural banks tend to borrow from the Fed’s seasonal credit program in late August and September when production lines of credit are running out and annual crop revenue has yet to be realized.

However, Federal Reserve Governor Susan Bies recently questioned the need for the continuation of such a program due to an increase in funding opportunities for smaller lending institutions.

“Funding opportunities for smaller depository institutions have expanded significantly over the past few decades as a result of deposit deregulation and the general development of financial markets, calling into question the continued need for the seasonal program,” Bies says.

According to the American Bankers Association’s Farm Credit Survey Report, 70 percent of farm banks in 2001 reported deposit growth was sufficient to meet loan demand, up from 42.5 percent in 2000.

For many community banks, funding and liquidity issues remain an ongoing concern, Leggett says. “Farm banks with a heavy farm loan concentration of at least 50 percent, had a greater likelihood of seeing loan demand out pace deposit growth in 2001. For example, deposit growth was less than four percent for farm banks with 50 percent or more of their loan portfolio in agriculture over the 12-month period ending June 2001, versus 7.6 percent for other farm bank lenders.”

These rural farm banks are also more likely to turn away credit-worthy customers, the American Bankers Association’s analysis found.

While overall, only 2.3 percent of banks report rejecting applications from creditworthy customers due to lack of funds, the number jumps to 5.6 percent for those banks with loans growing faster than deposits. Banks with less than $50 million in assets and more than 50 percent of their portfolio in agricultural-related loans turn away an average of 8.1 percent of credit-worthy applicants, Leggett says.

He says, “Because loan demand has outpaced deposit growth for many rural banks, these institutions have had to seek alternative sources of funding. Nearly six out of ten rural and farm banks surveyed by the American Bankers Association in 2001 used non-deposit sources of liquidity or loanable funds in 2001 with almost 16 percent of the banks using the Federal Reserve’s seasonal borrowing program. Smaller banks under $100 million in assets were more likely to use the seasonal borrowing program than larger banks.”

According to the president of one Delta-area community bank, community banks in the Mid-South typically have $100 million or less in assets, and high concentrations of farming-related loans. “Lines of credit with the Federal Reserve, or with other lending institutions, are often set up during the peak borrowing season to meet short term deposit or liquidity needs,” the bank officer says.

Leggett adds, “The seasonal borrowing program remains an important tool for rural and farm banks, especially smaller institutions, to meet peak lending period needs. Any changes in the program may disadvantage rural and farm communities.”